35% Share Of Gross Receipts From AOP Is 'Revenue Sharing' Taxable As Business Income, Not Tax-Exempt 'Share Of Profit': Supreme Court

"It is a well-settled principle of accounting and law that profit is the surplus that remains after all the expenses have been deducted from the gross receipts. Since the SPPL’s share remained insulated from the expenses of the AOP, the amount received by it lacks the essential characteristics of ‘profit’," Supreme Court, in a significant ruling dated May 12, 2026, held that a 35% share of gross sale receipts received by a member of an Association of Persons (AOP) constitutes taxable revenue and not a tax-exempt share of profit.

A bench of Justices J.B. Pardiwala and K.V. Viswanathan observed that since the amount was received upfront without any deduction for business expenses, it was in pith and substance a business receipt arising from the surrender of development rights.

The appellant, Sanand Properties P. Ltd. (SPPL), entered into an agreement to constitute an Association of Persons (AOP) titled 'Fortaleza Developers' for real estate projects. SPPL claimed that its 35% share from the AOP was a "share of profit" and thus exempt from tax under Section 86 of the IT Act. The Revenue subsequently issued notices under Section 148 to reopen assessments, contending that the receipt was actually revenue sharing for development rights and had escaped assessment.

The primary question before the court was whether the reopening of assessments for the Assessment Years 2007-08 and 2008-09 was valid or if it amounted to a mere "change of opinion." The court was also called upon to determine whether the 35% share of gross receipts accrued to SPPL under the AOP agreement was a tax-exempt "share of profit" or taxable "business revenue."

Reopening Valid If No Opinion Formed In Original Assessment

The Court first addressed the validity of the reopening of assessments under Section 147 of the IT Act. It noted that for a valid reopening, there must be "tangible material" and a "reason to believe" that income has escaped assessment. The bench emphasized that the power to reopen is not a power to review, and an assessment cannot be reopened on a mere change of opinion.

Court Clarifies Meaning Of 'Change Of Opinion'

The bench observed that a change of opinion presupposes the existence of a previously formed opinion during the original proceedings. In the present case, the court found that the Assessing Officer had only "fleetingly" mentioned the AOP income in the original assessment order without any inquiry into its nature. The court noted that to constitute a change of opinion, there must first be a conscious application of mind.

Assessing Officer Never Formed Opinion On Fundamental Nature Of Income

The court found that the original assessment order had erroneously conflated a 2002 Joint Venture agreement with the 2003 AOP agreement. While the JV pertained to commercial units, the AOP was for residential units. The bench noted that the Revenue had accepted the assessee's declaration at face value without delving into whether the income was indeed a share of profit.

Reopening Based On Fresh Information Is Not Change Of Opinion

The Court relied on the precedent in Phool Chand Bajrang Lal v. ITO, holding that if fresh facts come to light or new information exposes the untruthfulness of earlier facts, it is not a case of change of opinion. The bench held that the discovery of the AOP agreement and the director's statement during a survey provided the necessary jurisdictional basis for the Revenue to reopen the assessments.

Interpretation Of Contractual Clauses Is A Question Of Law

Moving to the merits, the Supreme Court rejected the finding of the High Court and ITAT that the nature of the receipt was a finding of fact. Citing Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd., the bench held that the construction of a document which is the foundation of the rights of parties necessarily raises a question of law.

Profit Is Surplus Remaining After Deduction Of All Expenses

The Court conducted a literal reading of Clause 7 of the AOP Agreement, which was titled "Sharing of revenue and Income." The clause mandated that SPPL would receive 35% of the gross sale proceeds upfront, while the entirety of the project's expenses was to be borne by the other member out of the remaining 65% share.

Income Insulated From Expenses Lacks Characteristics Of Profit

The bench observed that since SPPL's share remained insulated from the expenses of the AOP, the amount lacked the essential characteristics of "profit." The court held that "profit" is the surplus that remains after all expenses are deducted from gross receipts. Because the 35% share was calculated on gross receipts before expenses, it was "in pith and substance, a business receipt."

Court Applies Principle Of Diversion Of Income By Overriding Title

The Court relied on its classic decision in CIT v. Sitaldas Tirathdas to explain the distinction between an obligation to pay income and a diversion of income. It held that the 35% share was intercepted and diverted towards SPPL by a pre-existing right before it could even assume the character of income in the hands of the AOP.

Income Accrued Upfront Is Taxable In The Hands Of The Member

The bench concluded that the entitlement of SPPL was embedded in the framework of Clause 7 and attached to the gross receipts at the point of their accrual. Since the AOP neither acquired nor retained control over this portion, it was a diversion for the AOP and remained taxable income in the hands of the recipient member, SPPL.

The Supreme Court allowed the Revenue's appeal and dismissed the assessee's challenge. The Court held that the reopening of assessments was valid as no opinion had been formed originally. Furthermore, it ruled that the 35% share of gross receipts received by SPPL was taxable as a business receipt and not exempt as a share of profit.

Date of Decision: May 12, 2026